Backblaze equity raise raises questions
Two weeks ago, they said they didn't need cash
BLZE announced yesterday morning they are raising $35m of equity by issuing an additional 6.25m shares at $5.60, expected to close today. I won’t bury the headline; this feels like a significant deviation from Marc Suidan’s (new CFO) comments two weeks ago:
If you have sufficient liquidity to run the business until you’re producing cash and everything is on track, why raise money and dilute the stock? I will admit the end of the second paragraph says “we’ll always look at opportunities to improve our capital structure”. But does raising money when the stock is near multi year lows improve the capital structure?
The company had 44.4m shares outstanding as of 10/31, so this is ~14% dilution. Here are my estimates of how cash, shares and valuation will change after today (note share price is from before the announcement):
The company’s cash position at ~$61m is now the highest it has been in years. Why? I can think of two very different possibilities:
The company didn’t correctly forecast its cash needs. Maybe overruns occurred in data center maintenance or fixing an unforeseen issue with onboarding a new customer. They had to emergency raise cash through equity because raising debt would take too long and/or be too restrictive. In Q4, the company comes out and announces they won’t be FCF positive next year.
The company has an amazing opportunity where it’s very clear Return on Invested Capital (ROIC) will be higher than its cost of equity. Maybe they won a huge customer that will store several more exabytes of data and capex needs to be spent now.
I think as a responsible investor you have to lean (1) over (2). My conviction on the stock is now far less than pre-raise. All that said, I am willing to wait to see more cards as playing the other side:
My sense from the last call is management is very margin and cost reduction focused for 2025. The new CFO just started with the company in August. A much larger cash position and new leadership perhaps is a margin of safety going forward, and the odds are maybe larger the company never has to raise equity again
Q3 positively surprised me on margin guidance. As a reminder, the guide was 20% adj. EBITDA margin by end of next year with 75% incremental cash contribution margins ($0.75 of every new revenue dollar makes it to bottom line)
The stock remains cheap by my estimates for next year
From an end of 25 valuation perspective, I think if you buy adj. EBITDA is a relevant number (my Q3 update past goes through how to walk to FCF), the stock now trades ~16x forward EBITDA with conservative assumptions (20% top line growth and 12% margins):
Why do I think this is conservative on adj. EBITDA?
Top line just grew 29% y/y and B2 (business division) is growing 39%. Company Net Revenue Retention (NRR) is 118% at the company level and 120% for B2. A small amount of new sales and normal upgrades will get them to 20%, which would be a big slowdown from this year
The company is targeting a 20% adj. EBITDA margin by end of next year and did 12% for Q3. 12% for next year feels conservative
So, I am perhaps misguidedly willing to give BLZE another chance. This equity raise changes the story and I think by holding I am giving management the benefit of the doubt. Time will tell if I’m being too forgiving.